10 Rules All Entrepreneurs Must Follow to Divorce-Proof Their Business Financially

December 27, 2014

8:00 am

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America can be now be considered “the land of divorce.” In fact, according to the American Psychological Association, 40-50% of married couples in the United States divorce. The trouble is, when couples tie their business with their spouses, this can end in divorce. Being an entrepreneur does not bode well to this statistical fact. However, if you follow these 10 rules you may be able to divorce-proof your business financially.

1. Prenuptial agreement

Prior to the wedding, have a family law attorney draft a prenuptial agreement that clearly identifies the business as a separate property. In order for a prenuptial agreement to be effective, both parties must have their own separate attorneys. A few other helpful tips are that a prenuptial agreement must be in writing. No coercion can take place. It must be strictly voluntary. There must be full disclosure of assets and liabilities, preferably, performed in front of a third party.

However, if you’re already married you can always hire a family law attorney to draft a postnuptial agreement. Without advanced arrangements between you and your partner, your business maybe divided or worse, and you may end up sharing that business with your partner for a very long time.

2. Not willing to sign a pre or postnuptial?

If you don’t feel comfortable asking for a prenuptial or vice versa, another option is setting up a domestic asset protection trust (DAPTs). This strategy does not need your spouse’s approval. According to the American Bar Association, it transfers ownership of your company into a trust. This means that the trust would legally own your company. This works for most entities but not always with S Corporations. Speak to an attorney to see if this method would work for you, as a trust can mitigate the possibility of martial legal challenges.

3. Keep your business finances separate from personal finances

According to Jason Vitug, Founder of Phroogal, make sure that your business and personal finances are clearly separated. That means no commingling of personal and business finances and assets; don’t buy that new shiny car as a “business expense”.

4. Keep your spouse outside the business

If your spouse plays a role in your business, they can make the case that they deserve a share of the cut, once a divorce settlement ensues. To mitigate the risk, it is best to keep business and pleasure separate. Following a divorce, separating your bank account with your spouse is a priority, according to Jim Poolman, Executive Director of Indexed Annuity Leadership Council.

5. Pay yourself a market salary

If you are married, don’t under-pay yourself for the size and your position of your business. Vitug mentioned a problem might ensue if a spouse may be seen as taking a smaller salary than they should have taken, thereby impacting the quality of their family life. The spouse could have legal recourse to future profits.

7. Buy-sell agreement

In the case of a divorce, ownership status may change. With a buy-sell agreement it could prevent your spouse from acquiring ownership. This is also known as a “business will”. It is recommended to speak to a financial planner to ensure that there will be money when the agreement is triggered.

8. Liquidate Life Insurance

In the unfortunate event of getting a divorce, it may be wise to liquidate your life insurance to buy out your partner, according to Tice. However, depending upon your age, it may be a better idea to keep your insurance policy in place.

9. Get help from a financial advisor

It is important for any entrepreneur to seek professional financial advice. According to Poolman, a financial advisor can help you maximize your financial benefits and minimize taxes during a divorce.

10. Seem too late?

If you’re already married and it seems too late, you can get a valuation from a licensed consultant and then buy out your partner. The evaluation should not only include current but also future revenue. You can also structure a payment plan and buy out your spouse’s share overtime.

Conclusion

As an entrepreneur, divorce-proofing your business is essential. Overall, entrepreneurs should consult with legal and accounting experts because situations do vary a great deal. As entrepreneurs, we should protect our family and business life by ensuring we keep distinct separation of the two. By filing the right legal paperwork and keeping sound accounting records, it will make it easier to show the boundaries between personal and professional finances. Following these rules may help lessen the blow of divorce.

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Zach Schleien is one of the co-founders of TopRomp.com. He has a love for startups, analytics, dating technology and bulletproof coffee. Shoot Zach an email or follow him on twitter. He appreciates a nice comment from time to time.